The story behind Fannie Mae and Freddie Mac

People who have obtained a mortgage in Connecticut, or are actively seeking one, have likely heard the names Fannie Mae and Freddie Mac. They might sound like the names of friendly new neighbors, but in reality, they are government-sponsored agencies who guarantee most of the mortgages in the United States.

To guarantee a loan is to make a promise to assume responsibility for paying a borrower’s debt, either in whole or in part, in the event of a default. By providing mortgages, lenders take a significant financial risk. Having Freddie Mac and Fannie Mae guarantee the loans reduces the risk for lenders and makes mortgages more affordable for borrowers. 

According to the Federal Housing Finance Agency, the purpose of Fannie Mac and Freddie Mac is to make mortgages affordable and keep the market stable. They accomplish this by providing ready access to funds for banks and other lenders that finance house purchases through mortgages. The financial term for this ready access is liquidity. Banks can obtain more liquidity to engage in further lending by selling mortgages back to Freddie Mac and Fannie Mae. The companies then either package them into mortgage-backed securities or hold them in a portfolio. 

The Consumer Financial Bureau explains that, although Fannie Mae and Freddie Mac operated with the permission of the government, while subject to its regulation, they were both initially private companies. This changed with the financial crisis of 2008, which necessitated a takeover of operations of both companies by the government. Today, the two companies and the government each have a role to play in creating the eligibility requirements that a potential homebuyer must meet to qualify for a conventional mortgage loan.